Neighbor Poland is an enticing model for Ukraine

WARSAW (Reuters) - World leaders marking 25 years since Poland began its transformation into a free-market democracy had a message this month for neighboring Ukraine: you too could follow the same path to prosperity.

Fundamentals of the two economies suggest Ukraine can aspire to match the progress Poland has made since communism fell. But first it must get to grips with its high energy consumption, and the corruption and poor governance that puts off many investors - precisely the main reasons why Ukraine remains so poor.

Back in 1990, shortly before Ukraine split from the crumbling Soviet Union, it had a gross domestic product per head of population of $6,806 while the figure for Poland was only $5,976. Since then Ukrainians' living standards have risen little whereas on some measures Poles' have more than tripled.

"Ukraine has a huge potential for development," said Pawel Borys, director for strategy and investment at PKO BP, Poland's biggest bank. "Unfortunately (that) has been wasted over the last 25 years."

PKO BP owns Kredobank, a mid-sized Ukrainian lender, but Borys was cautious about whether his bank planned to invest more in the country. "It all depends on whether we will see real changes in Ukraine which will create a friendly climate for foreign investors," he told Reuters.

Poland has become a stable democracy since the first partially-free elections a quarter century ago - notwithstanding a succession of short-lived governments in the 1990s and a current crisis involving the central bank governor and interior minister which might force a snap election.

After short but sharp free-market shock therapy, it has also achieved uninterrupted economic growth for the past two decades, making it an attractive model for Ukraine.

Poland's GDP per capita in 2012 was $22,783 in purchasing power terms, compared with just $8,478 in Ukraine, according to World Bank figures.

U.S. President Barack Obama, in Warsaw for the anniversary celebrations, told an audience including Ukraine's newly-elected President Petro Poroshenko that the Ukrainians of today were "the heirs of Solidarity", the Polish movement that challenged Communist rule in the 1980s.

Polish President Bronislaw Komorowski said his country's success had been "a huge, enormous example .... In my opinion (this) was a component part of the dreams of Ukrainians, of going down the same road, in the direction of the same values".

CONVERGENCE

Trying to chart whether Ukraine can match Poland's economic performance is not an exact science.

There are dozens of factors which could skew forecasts, including Ukraine's separatist rebellion, and the question of whether Kiev will ever join the European Union. Poland's accession in 2004 spurred its growth.

But using the Polish example helps at least to establish a rough benchmark of where Ukraine could get to, and the main obstacles it would need to overcome. Several measures of Ukraine's raw potential suggest it is not far behind Poland, and, in some respects, in an even better position.

In Ukraine, around 80 percent of secondary school students went on to university in 2012, compared with 73 percent in Poland, according to data cited by the World Bank. These figures do not take the quality of the education into account.

Ukrainian labor force participation - the share of working-age people who are either employed or unemployed but looking for a job - was 59 percent in 2012, according to the World Bank, a little higher than Poland's 57 percent.

The country has vast reserves of iron ore and some of the best farmland in the world. Agriculture occupies over 70 percent of Ukrainian territory compared with 49 percent in Poland.

CHALLENGES

However, two figures show a striking divergence. One is a World Bank measure of energy efficiency. On this, Ukraine produced $3 of GDP in 2011 for every unit of energy equivalent to one kg of oil that it consumed, compared with $8.3 in Poland.

International donors have pressed successive Ukrainian governments to adopt legislation that would improve energy efficiency, but with little success.

Heavy energy use is a particular handicap because Ukraine imports much of its natural gas from Russia, for which it pays a higher price than many of Russia's EU customers.

With relations in crisis over Russia's annexation of Crimea and the rebellion in eastern Ukraine, high consumption is also a political risk as it entrenches Kiev's dependence on Moscow.

Corruption is the other measure on which there is a wide gulf. The Transparency International corruption perception index, which places the cleanest countries at the top of its ranking, put Poland in 38th place out of 177 countries in 2013, and Ukraine in 144th place.

"We have had very bad experiences in recent years, especially with actions of tax offices and court decisions totally failing to meet international standards," Borys, from Polish bank PKO BP, said of its business in Ukraine.

Corruption translates into lower foreign investment. In the last 20 years Poland has attracted over $180 billion of foreign direct investment, central bank data shows. Ukraine, which has a larger population, has attracted just over $52 billion in the same period, Ukrainian statistics office data shows.

One economist familiar with both countries said Ukraine has potential but because of corruption and governance problems it may be more realistic for it to take as its model not Poland but Romania and Bulgaria, the EU's poorest members.

(Additional reporting by Marcin Goclowski in WARSAW, Pavel Polityuk in KIEV; Editing by David Stamp)